December 15, 2013 7:51 am

Large US corporations in the dock over retirement plans

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Caterpillar Inc. bulldozers, including a model D6T LGP, center, sit on display at a Patten Industries Inc. dealership in Elmhurst, Illinois, U.S., on Monday, Jan. 28, 2013. Caterpillar Inc., the largest maker of construction and mining equipment, said gains in its sales and profit this year will come in the second half as the world economy improves. Photographer: Daniel Acker/Bloomberg©Bloomberg

In 2009, Caterpillar settled a lawsuit regarding its pension plan for $16.5m

In early November MassMutual, the US insurer, became the latest target of dozens of lawsuits regarding the management of the retirement plans of some of the largest companies in the US.

The wave of fee litigation began in 2006 when Schlichter Bogard & Denton, a Missouri-based law firm, brought the first of a series of lawsuits under the 1974 Employee Retirement Income Security Act.

The cases allege the companies breached their fiduciary duties to participants in their 401(k) plans, which are roughly equivalent to defined contribution programmes in Europe, by charging excessive fees. Some suits also claim the plans engaged in improper revenue-sharing arrangements with service providers.

“These lawsuits have pushed fees and revenue sharing to the very top of the list of issues that plan fiduciaries have to face,” says Greg Ash, partner at Spencer Fane, a US law firm. “These cases, and the [Department of Labor’s] focus on fees, have completely changed the dialogue among plan fiduciaries.”

Including the MassMutual suit, Schlichter Bogard & Denton has now pursued 17 such cases. Other law firms have filed similar suits on behalf of retirement plan participants.

The litigation has had a profound impact on the retirement industry, leading to fee reductions and changes in the way companies manage their 401(k) plans. Many cite the Department of Labor’s rules requiring greater disclosure about fees as also exerting enormous influence on the retirement industry. The rules went into effect in 2012, but were first floated in 2007.

The average total cost to run a retirement plan, which includes both investment and administration fees, has decreased from 85 basis points in 2009 to 80bp in 2011, according to BrightScope, a research company that evaluates retirement plans. Data for 2012 were not available at the time of publication.

Eight of the lawsuits have resulted in settlements of $150m in total.

Caterpillar, the heavy machinery manufacturer, was the first to settle in 2009 for $16.5m. General Dynamics, The Hartford, Bechtel, Walmart and Kraft have also reached settlements in recent years. The biggest settlements yet came earlier this year, when Cigna, the health insurer, agreed to pay $35m, and International Paper $30m.

But the defendants have won several important cases.

In early 2009, the US Court of Appeals for the Seventh Circuit upheld a lower court’s decision to dismiss a lawsuit against John Deere, the farm equipment manufacturer, and the plan’s administrator, Fidelity.

The plaintiffs claimed the company failed to monitor the plan’s investment options and that Fidelity charged excessive fees and did not notify participants of its revenue-sharing agreements.

The court ruled that Fidelity was not a fiduciary of the plan, and therefore did not breach any such duties.

“[The case] was the first real victory” for defendants, says Ian Morrison, partner at Seyfarth Shaw.

Patrick DiCarlo, counsel at Alston & Bird, notes the court gave particular weight to the fact that John Deere’s pension plan provided participants access to a brokerage option with more than 2,000 fund choices. While the case was a good win for defendants, “not every case has the same set of facts”, Mr DiCarlo says.

The plaintiffs asked the Supreme Court to review the appellate court’s decision, but the higher court declined in early 2010.

Unisys, Exelon and United Technologies also succeeded in getting courts to throw out the 401(k) litigation against them.

There have been only two trials of 401(k)-fee suits, in the ABB and Edison International cases. The trials resulted in partial judgments for the plaintiffs.

A Missouri federal court ruled in April 2012 that ABB, the US unit of a Switzerland-based manufacturer of power and automation equipment, was liable for removing a Vanguard fund from the plan menu in favour of Fidelity target-date funds.

The court also ruled that the company paid Fidelity, the plan’s administrator, above-market rates in order to subsidise separate ABB corporate services.

The court ordered ABB to pay $35m. It ordered Fidelity to pay $1.7m for breaching its fiduciary duties in how it handled earnings on money moving to and from the plan’s investment options, known as float.

Both ABB and Fidelity have appealed against the decision to the Eighth Circuit Court of Appeals. The court heard oral arguments in September.

In the meantime, the lower court’s decision has spawned at least four class-action suits against Fidelity over how it deals with float. The cases have all been filed this year.

A federal court in California threw out most of the claims against Edison, but ordered the company to pay about $370,000 in damages related to excessive fees and lost investment earnings on several funds.

The plaintiffs have asked the Supreme Court to review the appellate court’s decision.

Jerome Schlichter, attorney for the plaintiffs in many of the cases, says he is pleased to see the changes taking place in the retirement industry.

“But there are plan sponsors and fiduciaries who still have not gotten the message that this is a serious obligation they have when they set up a 401(k) plan,” he says.

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